Don't Write Off Green Investments in China

Just before Christmas, Bo Bai, a Beijing-based private equity investor, poured Rmb500m ($77m) into Huitongda Network, an e-commerce platform based in the Chinese city of Nanjing.
Huitongda plans to supply almost 80,000 local shops and their 50m customers with green products such as rooftop solar panels.

Until late 2016, Mr Bai was a high-flying executive working for US private equity firm Warburg Pincus in China.
Since then he has been running the US-China Green Fund, a private equity firm that targets investments that will help reverse decades of environmental degradation on the mainland and lift living standards in rural China.

To many outside investors, China appears an unpredictable place to put money, but piggybacking on government policy has historically been a safe way to generate juicy returns.

For example, when newly established Premia Partners back-tested its recently listed ‘bedrock economy’ ETF, made up of state-owned enterprises that Beijing relies on to carry out its policies, it suggested it would have earned investors 24 per cent in the three years through to the middle of last year and almost 22 per cent over a five-year period.

And today nothing is higher on Beijing’s priority list than reducing pollution and cleaning up the country’s toxic air, soil and water. Indeed, environmental protection was declared one of the top goals at the Party Congress meeting last October.
What is more, targeting green investments has the added bonus that industries behind innovations such as electric vehicles, greater energy efficiency and waste water recovery are generating jobs.

It is not just in China that green investment is growing. “Climate change and extreme weather is the number one global risk: impacting 60 per cent of the population and costing 5 per cent of GDP by 2100,” according to a new report on the sector from Bank of America Merrill Lynch.

“New paradigms are emerging, with some of the fastest growth areas being transport and the adoption of autonomous, connected, electric, shared vehicles and smart cities.”
About $70tn will be spent on low-carbon investments through to 2040, giving a boost to renewables, energy efficiency and future mobility, the report forecasts.

More than 100 multinational companies will be beneficiaries of these trends across clean energy, electric vehicles, battery and storage, and transport and the internet of things. About 15 per cent of those recommended are Chinese.

Some investors worry that a greater emphasis in China on quality growth, including its environmental impact, will ultimately lead to a much slower pace of expansion.
So far there is little evidence to support that fear. It has hardly affected the pace of economic expansion, while some of Beijing’s efforts to combat pollution have improved the profitability of many cash-strapped state-owned enterprises.

In an effort to reduce pollution, Beijing has tightened the production of steel, closed coal mines and reduced its reliance on thermal power.
As a result of the capacity reduction, the profitability of these industries has gone up. Today, fewer than 5 per cent of steel mills are lossmaking.

Green investment is part of a broader shift in the Chinese economy, as policymakers seek to shift from low-end manufacturing to one with a much bigger services sector.
Low valued-added manufacturing is becoming an ever smaller part of both the economy and exports.

Critically, at a time when the US under Donald Trump’s administration is relinquishing global leadership on climate change and environmental protection, there is a chance for China to establish a competitive edge in such technologies.

The ambitions of the US-China Green Fund echo those of officials in Beijing who are also keen to find ways to lift rural standards and reduce the wealth gap with urban China.
Moreover, Huitongda already has a third of all rural consumers in China, according to Mr Bai, and they are keen to upgrade their lifestyles.

The biggest selling products on Mr Bai’s e-commerce platform, for example, are air conditioners, hardly the most environmentally friendly products. “But at least, we can help ensure customers are buying energy efficient models,” says Mr Bai.
If Beijing stays serious about cutting pollution, and there is every sign it is, then green investing in China is something investors should wake up to.